The Empirical Study of the Association with Economic Value Added、Earnings and Stock Returns

Date of Defense

2002-06-22

Page Count

77

Keyword

Earnings

Granger Causality test

Economic Value Added

Abstract

Economic Value Added (EVA) is a residual income that corrects distortion of managerial incentives introduced by standard GAAP accounting. This study attempts to compare EVA with EPS and see which one is better. The difference between literature and this study is that we use not only cross-regression but also Granger causality test to make clear the relationship between stock return and performance measure and find out what is the value of EVA. Our main finding is as follows：1.EVA significantly positively affects the contemporaneous stock return, but EPS is insignificant. This support the existence of EVA.2.The components unique to EVA --- the cost of capital, significantly negatively affects the contemporaneous stock return, indicating that market does take into consideration the cost of capital when pricing the company.3.As to Granger causality relationship, there is no lead-lag relationship between stock return and EVA or EPS. This means that performance measure cannot be a predictor of future stock return.In a word, EPS, ignoring equity capital and being distorted by GAAP accounting, neither explains the contemporaneous stock return, nor forecasts the future. However, EVA, considering equity capital and correcting distortion of GAAP accounting, can explain the contemporaneous stock return by representing the intrinsic value of the company. But, EVA, being still on the basis of history, cannot forecast the future. Anyway, EVA can replace EPS in reflecting the operating of the company, that is the contribution of EVA.